Oh what a tangled web we weave when we begin to spend money we don’t have. We spend it because we think we’ll be able to pay it back later. Or, in the case of government debt, because it can make someone pay it back later through tax hikes. But the world is still full of bills that may never be paid. And if those bills (or bonds) represent assets on someone’s balance sheet, a lot of portfolios are going to take a hiding.
Stock markets are somewhere between Dr Jekyll and Mr Hyde this morning. The economic data emanating from the US and Europe isn’t good enough for anyone to get excited. And central bankers are expressing the view, for now, that there will be no more vodka in the punch bowl. This presents a problem for fund managers whose job it is to buy stocks. We’ll get back to them in a moment.
You are probably as tired of reading about other people’s debts as we are writing about them. But the issue won’t go away. Until debts are liquidated, it’s going to be impossible for the global economy to get back to anything resembling normal growth. Don’t hold your breath.
For example, Portuguese banks borrowed over €100 billion from the European Central Bank (ECB) in February and March, according to The Guardian. National banking systems in Europe are having a hard time borrowing money from private investors. The ECB is the lender of last resort.
The trouble is, it appears the money borrowed by Portuguese banks isn’t money used for loans to businesses and households. The money borrowed either props up the balance sheets of the banks (as a counterweight to enormous debts). Or, even worse, the money is used to buy yet more government bonds.
That was probably always the plan, of course. The ECB can’t directly buy government bonds. But it can lend money to banks through its Long Term Refinancing Operations (LTROs). And the banks can then buy government bonds. And then the governments have money to contribute to the bank bailout funds. And everyone is happy…but no one is any further to putting the crisis behind us.
It’s absurd, but it’s persistent. And for Australian investors, you just need to be aware that this kind of pedestrian pace to the debt crisis doesn’t mean it isn’t serious. It is. And it’s ticking.
What About Australian Government Debt?
In the meantime, Australia has its own mini-crisis ticking away. The debt ceiling on Commonwealth debt was raised last year to $250 billion. The government complained that revenues were lower than it planned for and expenses were higher. But it assured everyone things would turn around this year.
They haven’t. Commonwealth government debt is now over $240 billion, according to the Australian Office of Financial Management. At the rate the government is borrowing money, the debt ceiling will have to be lifted in about 20 weeks. And what rate are we talking about? Take a look at the spreadsheet below.
$11 billion in new government debt in 2012
Click here to enlarge
And you thought “debt ceiling” was a term that only applied to America. The Australian government lifted the debt ceiling from $75 billion to $200 billion two years ago. Then, in the middle of last year it lifted the ceiling again to $250 billion. With $11 billion in borrowing this year alone, the government is on pace to hit the ceiling soon, at which point they will obviously raise it again.
It is hard to get emotional about debt figures. They are just figures. Besides, when the government spends that money now, it contributes to GDP and goes into someone’s pocket. Who cares about paying it back? That will happen in the future.
But you can see how this attitude becomes permanent. Regular deficits and regular borrowing become…well…regular. You get used to living beyond your means. And when interest rates are relatively low, and there are plenty of people lining up to buy your bonds at auction, you get all the benefit of the borrowing and none of the pain. Someone else gets the pain (your kids, but they are too young and carefree and stupid to know what’s being done to them).
In any event, our interest in the culture of debt is not moral. Our interest is what will happen when Australia’s growing culture of government debt crosses paths with its declining culture of equity. If you’ve been paying any attention to the papers in the last few months, you’d have seen one “expert” after another talk about how poorly informed superannuation investors are and how the super industry is too exposed to stocks as an asset class.
We wouldn’t disagree with that statement. But the people voicing it – Ken Henry, Lindsay Tanner, Jeremy Cooper and David Murray – may not necessarily be speaking out of the goodness of their hearts. If you make the argument that Australian investors are over-exposed to one asset class, then you are implicitly making the argument they should have more money in another asset class.
In other words, the people who are arguing that Australians have too much money in stocks may also be arguing that Australians have too little money in bonds. And since the corporate bond market is relatively immature, you’d need a bigger, more liquid, and nominally “safer” bond market to park super money in.
Presto. Change-o. You now have an argument for why larger government debt is a GOOD thing. It gives super funds another, “safer” asset class in which to park your retirement savings. And while we’re at it, let’s just lift your compulsory super contribution from 9% to 12%, with a certain percentage mandatorily going into fixed interest assets (government bonds, hush).
You don’t have to be too imaginative, or too paranoid, to see how all this is trending. But you don’t have to be passive either. Now more than ever is a good time for you to meet with your spouse and financial advisor to decide how you want your assets allocated. And decide where your money is going to work best for you in the coming years. More on that question tomorrow.
for Markets and Money
From the Archives…
Fake Savings, Detached Investments and the Mining Boom
2012-04-06 – Nick Hubble
2012-04-05 – Greg Canavan
How to Avoid Investing Idiocy by Ignoring the Fed
2012-04-04 – Dan Denning
Warren Buffett Scorns Gold. Bad Move!
2012-04-03 – Addison Wiggin
Heralding the Unsung Benefits of Frontier Markets
2012-04-02 – Joel Bowman